Sony Rejects Loeb Proposal for Splitting Off Entertainment Unit

Updated, 6:31 a.m. | Sony said late on Monday that it planned to keep all of its vast entertainment arm, rejecting a proposal by one of its biggest investors, the activist hedge fund manager Daniel S. Loeb.

The decision, announced in a publicly disclosed letter to Mr. Loeb, raises questions about whether he will stage a public fight with Sony.

Mr. Loeb first disclosed a big stake in Sony — now about 7 percent — in May, in a big bet that he can shake up a Japanese company when many foreign shareholders have tried, and failed.

The letter followed a meeting between Mr. Loeb and Sony’s bankers on July 17, at his Midtown Manhattan offices. The tone of the meeting was cordial, said a person briefed on the matter.

Last week, the hedge fund manager sharpened his critique of the entertainment business in a letter to his investors, writing, “Keeping entertainment underexposed, undervalued and underperforming is not a strategy for success.” (He has kept correspondence with the company more friendly, hewing to Japanese business practices.)

Sony’s chief executive, Kazuo Hirai, wrote in Monday’s letter that the company had considered Mr. Loeb’s proposal of spinning off part of the entertainment unit to the public markets. But Mr. Hirai wrote that after consulting with its financial advisers, Sony believed that owning all of the business would let it better mesh with its core electronics operations, without the legal encumbrances a partial spinoff would entail.

Moreover, Mr. Hirai wrote that Sony had considered and dismissed the notion that the company needed the capital that Mr. Loeb’s plan would have generated. Should it need to raise more money, Sony would look to other avenues for financing, he wrote.

But Mr. Hirai made one concession, writing that Sony’s entertainment arm would begin disclosing more information about its performance. Advisers to Sony had also recommended rejecting the proposal because of the tough history of partial spinoffs, a person who had been briefed on the matter said. A number of companies have tried listing subsidiaries on the public markets, with many having resorted to buying back the operation afterward.

Those cases include News Corporation’s brief experiment with having its Fox Entertainment arm listed publicly in 1998, only to take it private again seven years later.

Jonathan Olley/Columbia PicturesSony Pictures Entertainment released “Zero Dark Thirty,” which was nominated for an Academy Award for Best Picture, in the United States.

Mr. Loeb’s firm, Third Point, said in a statement that it was “disappointed” in Sony’s move, but added that it welcomed the effort to introduce more transparency at the entertainment arm. The hedge fund also said that it wanted the company to come up with other ways to raise profitability in the entertainment business.

“Third Point looks forward to an ongoing dialogue with management and intends to explore further options to create value for Sony shareholders,” the firm said.

A version of this article appears in print on 08/06/2013, on page B2 of the NewYork edition with the headline: Sony Decides It Will Keep All of Entertainment Arm.